Commenced in January 2007
Frequency: Monthly
Edition: International
Paper Count: 30172
A New Measure of Herding Behavior: Derivation and Implications

Authors: Amina Amirat, Abdelfettah Bouri

Abstract:

If price and quantity are the fundamental building blocks of any theory of market interactions, the importance of trading volume in understanding the behavior of financial markets is clear. However, while many economic models of financial markets have been developed to explain the behavior of prices -predictability, variability, and information content- far less attention has been devoted to explaining the behavior of trading volume. In this article, we hope to expand our understanding of trading volume by developing a new measure of herding behavior based on a cross sectional dispersion of volumes betas. We apply our measure to the Toronto stock exchange using monthly data from January 2000 to December 2002. Our findings show that the herd phenomenon consists of three essential components: stationary herding, intentional herding and the feedback herding.

Keywords: Herding behavior, market return, trading volume.

Digital Object Identifier (DOI): doi.org/10.5281/zenodo.1059988

Procedia APA BibTeX Chicago EndNote Harvard JSON MLA RIS XML ISO 690 PDF Downloads 1894

References:


[1] Amihud, Y, (2002). Liquidity and stock returns: cross-section and time series effects. Journal of Financial Markets 5, 31-56.
[2] Ang, A., and J. Chen, (2005). CAPMover the Long Run: 1926-2001. Columbia University, working paper.
[3] Banerjee, A. (1992). A simple model of herd behavior. Quarterly Journal of Economics, 107 (3), 797- 818.
[4] Bikhchandani, S., and S., Sharma, (2000). Herd Behavior in Financial Markets: A Review. IMF Working Paper WP/00/48 (Washington: International Monetary Fund).
[5] Breen, W., Glosten, L., Jagannathan, R., 1989. Economic significance of predictable variations in stock index returns. Journal of Finance 44, 1177-1189.
[6] Cappiello, L., Engle, R., K., Sheppard, (2006). Asymmetric Dynamics in the correlations of global equity and bond returns. Journal of Financial Econometrics 4, 537-572.
[7] Chang, E., Cheng, J., and A.Khorana, (2000). Examination of herd behavior in equity markets: an international perspective. Journal of Banking and Finance, 24(10), 1651-1679.
[8] Chen, G.M., B.S. Lee, and O.M. Rui, (2001). Foreign ownership restrictions and market segmentation in China-s stock markets, Journal of Financial Research, 24, 133-155.
[9] Christie, W., and R., Huang, (1995). Following the pied pier: do individual returns herd around the market, Financial Analysts Journal, 51(4), 31- 37.
[10] Devenow, A., I., Welch, (1996). Rational herding in financial economics. European Economic Review 40, 603-615.
[11] Ferson, W.E., C.R., Harvey, (1991). The variation of economic risk premiums. Journal of Political Economy 99, 285- 315.
[12] Ferson, W.E., C.R., Harvey, (1993). The risk and predictability of international equity returns. Review of Financial Studies 6, 527- 566.
[13] Ferson, W.E., R.A., Korajczyk, (1995). Do arbitrage pricing models explain the predictability of stock returns? Journal of Business 68, 309- 349.
[14] Friedman, B.M. (1984). A Comment: Stock Prices and Social Dynamics. Brookings Papers on Economic Activity, 2, 504-508.
[15] Gallant, R., Rossi, P., and G., Tauchen, (1992). Stock Prices and Volume. Review of Financial Studies, 5, 199-242.
[16] Givoly, D., and D., Palmaon (1985). Insider trading and the exploitation of inside information: some empirical evidence. Journal of business, 58, 69-87.
[17] Glosten, L. R., Jagannathan, R., and D., Runkle (1993). On the relation between the expected value and the volatility of the normal excess return on stocks. Journal of Finance 48, 1779-1801.
[18] Gomes, J., L. Kogan, and L. Zhang (2003). Equilibrium cross section of returns. Journal of Political Economy 111, 693-732.
[19] Goyal, A., P., Santa-Clara, (2003). Idiosyncratic risk matters. Journal of Finance, 58 (3), 975-1008.
[20] Grinblatt, Titman, and Wermers. (1995). Momentum investment strategies, portfolio performance, and herding: A study of mutual fund behavior.American Economic Review, 85, 1088-1105.
[21] Harvey, C.R., 1989. Time-varying conditional covariances in tests of asset pricing models. Journal of Financial Economics 24, 289- 317.
[22] Hirshleifer, D., and S.H., Teoh, (2003). Herding and cascading in capital markets: a review and synthesis. European Financial Management 9, 25- 66.
[23] Hwang, S., and M., Salmon, (2001). "A New Measure of Herding and Empirical Evidence", a working paper, Cass Business School, U.K.
[24] Hwang, S., and M., Salmon, (2004). Market Stress and Herding. Journal of Empirical Finance, 11(4), 585-616.
[25] Hwang, S., M., Salmon, (2006), Sentiment and beta herding. Working Paper. University of Warwick.
[26] Keynes, J.M. (1936). The general theory of employment, interest, and money. London: Macmillan.
[27] Koopman, S., and E., Uspensky, (2002). The stochastic volatility in mean model: empirical evidence from international stock markets. Journal of Applied Econometrics 17(6), 667-689.
[28] Lai, M., and S., Lau, (2004). Herd behavior and market stress: The case of Malaysia. Academy of Accounting and Financial Studies Journal, 8 (3), 85-102.
[29] Lakonishok, Shleifer, and Vishny (1992). The impact of institutional trading on stock prices. Journal of Financial Economics, 32(1), 23-44.
[30] Lamoureux, C., and W., Lastrapes, (1990). Heteroskedasticity in Stock Return Data: Volume Versus GARCH Effects. Journal of Finance, 45, 1990, 221-228.
[31] Lettau, M., and S., Ludvigson, (2001). Resurrecting the (C)CAPM: A cross-sectional test when risk premia are time-varying, Journal of Political Economy 109, 1238-1287.
[32] Lifson, L.E. & R.A. Geist (1999). The psychology of investing. New York: Wiley.
[33] Lux, T. and D. Sornette (2002). On Rational Bubbles and Fat Tails, The Journal of Money, Credit and Banking, Part 1, vol. 34, No. 3, 589-610.
[34] Nelson, D.B., (1991) Conditional heteroskedasticity in asset returns: A new approach, Econometrica 59, 347-370.
[35] Parker, Wayne D., and Robert R. Prechter Jr. (2005). Herding: An Interdisciplinary Integrative Review from a Socionomic Perspective, in Kokinov, Boicho, Ed., Advances in Cognitive Economics: Proceedings of the International Conference on Cognitive Economics, Bulgaria: NBU Press (New Bulgarian University), 271-280.
[36] Richards, A.J., (1999). Idiosyncratic Risk: An Empirical Analysis, with Implications for the Risk of Relative-Value Trading Strategies. IMF Working Paper WP/99/148
[37] Scharfstein, D.S. & J.C. Stein (1990). Herd behavior and investment. The American Economic Review, 80(3), 465-479.
[38] Schwert, G.W. and P.J. Seguin, (1993), ÔÇÿSecurities Transaction Taxes: An Overview of Costs, Benefits and Unresolved Questions-, Financial Analysts Journal, 49, 27-35.
[39] Shefrin, H. (2000). Beyond greed and fear: Understanding behavioral finance and the psychology of investing. Boston: Harvard Business School Press.
[40] Shiller, R.J. (1987). Investor behavior in the October 1987 stock market crash: Survey evidence. National Bureau of Economic Research Working Paper 2446, reprinted in Robert Shiller Market Volatility, 1989.
[41] Shiller, R.J. & J. Pound (1989). Survey evidence on diffusion of interest and information among investors. Journal of Economic Behavior & Organization, 12(1), 47-66.
[42] Sornette, D. (2003a). Why Stock Markets Crash: Critical Events in Complex Financial Systems, Princeton University Press.
[43] Sornette, D. (2003b). Critical market crashes. Physics Reports 378 (1), 1-98.
[44] Sornette, D. and J.V. Andersen (2002). A Nonlinear Super-Exponential Rational Model of Speculative
[45] Financial Bubbles, Int. J. Mod. Phys. C 13 (2), 171-188.
[46] Treynor, J., and F., Mazuy, (1966). Can mutual funds outguess the market? Harvard Business Review 44, 131-136.
[47] Tvede, L.L. (1999). The psychology of finance. (2nd ed.). New York: Wiley.
[48] Welch, I. (1992). Sequential sales, learning and cascades. Journal of Finance, 47, 695-732.
[49] Wermers, R. (1995). .Herding, Trade Reversals, and Cascading by Institutional Investors. University of Colorado, Boulder.